One-Third of ICC Sponsorship Fee Paid by LG Electronics relates to Trademark Use, Taxable as Royalty: Delhi HC Upholds 15% TDS [Read Order]

In a recent ruling, the Delhi High Court held that one-third of the ICC sponsorship fee paid by LG Electronics India Pvt. Ltd. to a Singapore-based entity related to the right to use the ICC trademark and was taxable as royalty, and that tax was required to be deducted at source at the rate of 15% under the India-Singapore Double Taxation Avoidance Agreement.

LG Electronics India Pvt. Ltd. filed a writ petition challenging an order passed by the Director of Income Tax (International Taxation) under Section 264 of theIncome Tax Act, 1961. The order arose out of proceedings under Section 195 concerning tax deduction at source on payments made by LG Electronics to Global Cricket Corporation Pvt. Ltd. (GCC) (a Singapore company) for sponsorship and advertising rights in ICC cricket events.

Under a Global Partnership Agreement dated 28 June 2002, GCC granted LG extensive advertising and promotional rights in connection with ICC cricket tournaments, including display of LG’s brand at stadiums, on electronic screens, tickets, official websites, and other event-related material. For these rights, LG agreed to pay USD 27.5 million, out of which USD 11 million was paid by LG Electronics India.

The company applied for permission to remit the amount without deducting tax at source, arguing that the payment was purely for advertising and sponsorship. The Assessing Officer (AO) rejected the request and treated the entire payment as royalty.

On revision, the Director of Income Tax partly accepted the company’s case and held that two-thirds of the payment related to advertising and one-third related to the right to use ICC trademarks, which was taxable as royalty at 15%.

Before the High Court, the company’s counsel argued that the dominant purpose of the agreement was advertising and brand promotion and that any use of the ICC logo or marks was only incidental.

The revenue counsel pointed out that trademarks are expressly covered within the definition of royalty under Section 9(1)(vi) of the Income Act as well as Article 12 of the India-Singapore DTAA. They also relied on LG’s own admission in its communication during revision proceedings that there was an element of trademark use.

The Division Bench comprising Justice V. Kameswar Rao and Justice Vinod Kumar observed that the company had itself conceded that the agreement involved use of ICC trademarks as defined in the agreement. The court observed that the right to use the ICC mark was not confined to stadium advertising but extended to a wide range of advertising and promotional material across the licensed territory, which was defined as the entire world.

The court explained that such rights amounted to a substantive license to use the trademark and could not be treated as merely incidental. The court further observed that consideration paid for the right to use a trademark falls within the definition of royalty under the Income Tax Act and the DTAA.

The court pointed out that the revisional authority had already granted huge relief by excluding two-thirds of the payment as advertising expenditure and taxing only one-third as royalty, and no serious challenge was raised to the method of apportionment.

The court held that the order passed under Section 264 was reasoned and legally valid and that the direction to deduct tax at source at 15% on one-third of the payment was justified. The writ petition was dismissed.

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